Massachusetts reportedly has begun an investigation concerning whether Wells Fargo Advisors engaged in unsuitable recommendations, inappropriate referrals, and other actions related to its sales of certain investment products to customers. Recently, Wells Fargo disclosed that it is evaluating whether its personnel and registered representatives may have made inappropriate recommendations and referrals concerning 401(K) rollovers and alternative investments.
Massachusetts Secretary of the Commonwealth William Galvin said the state would examine Wells Fargo’s own internal probe and wants to ensure that any Massachusetts investors who were impacted by “unsuitable recommendations” would be “made whole.” He noted that while moving investors toward wealth management accounts brings “more revenues to firms,” these accounts are “not suitable for all investors.”
Industry observers say that major stock brokerage firms have increasingly steered customers to accounts with recurring management fees based on a percentage of assets under management, rather than transaction-based commissions. As Barron’s magazine reports, referring clients to managed accounts tends to earn fee-based advisors significantly more over the long term.
The Barron’s article goes on to note that Galvin is looking into the use of managed accounts related to the US Department of Labor’s Fiduciary Rule, which includes best practices standards for the protection of consumers. However, that rule was recently overturned by a federal appeals court, calling into question its continued vitality.
Galvin is reportedly not the only regulator scrutinizing Wells Fargo over possible inappropriate sales recommendations. Bloomberg reports that according to a source, the SEC is also investigating the firm’s Wealth Management unit although. the investigation has not been made public.
Suitability of investment recommendations is governed by FINRA Rule 2111. See 75 Fed. Reg. 71479 (Nov. 23, 2010) (Order Approving Proposed Rule Change, File No. SR-FINRA-2010-039). Rule 2111 went into effect as of July 9, 2012, and represents a codification of former National Association of Securities Dealers (“NASD”) Rule 2310 and former New York Stock Exchange (“NYSE”) Rule 405, as well as regulatory guidance interpreting both rules. Rule 2111 mandates that a broker-dealer or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person… .” This rule would prohibit a recommendation for a customer to move to a management-fee based account if that recommendation lacked a reasonable basis.
Attorneys at Law Office of Christopher J. Gray, P.C. have represented investors in a number of cases involving unsuitable investments and investment strategies and alleged broker and financial advisor misconduct. Investors may contact a securities arbitration attorney by telephone at (866) 966-9598, or by e-mail at firstname.lastname@example.org for a no-cost, confidential consultation.